Summary
- For retirement one should create assets that generate pension income enough to meet expenses
- Retirement fund/income should be inflation adjusted and one should also factor risks and liquidity while making investment decisions
At some point in time, one would have to retire, therefore, one must plan his/her finances for post-retirement living. Although experts believe that one should start with retirement planning early in life, however, it is never too late. In simple terms, planning for retirement should be one of the financial goals in life.
The basic idea is about creating a strong and healthy retirement corpus, which could be a challenging task particularly for people who are starting late. The primary objectives of retirement planning are to lead a comfortable lifestyle and have a stable source of income to meet day-to-day expenses. These objectives should be kept in mind while chalking out a retirement plan.
In this article, we shall discuss basic hygiene measures that should be kept in mind while devising or choosing a retirement plan that suffices your needs.
Plan for pension income that is enough to meet your expenses
A stable source of recurring income is the most desired option for retirement seekers. This objective can be met by choosing the right pension plan. The periodic recurring income should be sufficient to meet your day-to-day expenses and for your dependents even after your demise. In some geographies, pension income is taxable, therefore, tax deduction should also be factored while planning your recurring income.
A pension scheme can be availed from the government, also known as the state pension. One may seek help from a financial adviser to choose the right pension scheme. Even after availing the pension scheme, you can increase your pension at a later stage as per your evolving needs. Thus, there is no right time to avail the pension scheme. It is better to start early.
ROI must outpace the rate of inflation
It is a no brainer that a good quality investment is essential for a retirement plan. However, the return on investment (ROI) must be greater than inflation; else the investment would be of no use. For instance, stuff that £10,000 can buy you today, will not be available 20 years from now. Inflation is like a virus that can erode the buying power of your corpus over a period. The best way to beat inflation in the long term is by investing in blue-chip stocks. However, the early you start, the better it is. Being invested in blue-chip companies over long term can help beat market volatility and lead to fruitful gains. Also, some blue-chip companies might reward you by paying out periodic dividends. Usually, the ROI in blue-chip companies is far greater than the rate of inflation.
Also read: 5 Dividend Stocks to Look at For Retirement Planning
Manage risk and liquidity
Creating a retirement fund might take your golden years. It is imperative of you to rebalance your portfolio from time to time to mitigate risk and ensure liquidity. For instance, most of us fear stock markets and choose debt instruments like bonds, funds for their investment. However, they too come with their own pot of risks.
People usually invest lumpsum in bonds and investment funds with or without a lock-in period. In the UK, investors can choose from Gilts (Government bonds) which are a lot safer in contrast to corporate bonds, which could be issued by private as well as government entities. Bonds trading is regulated and authorised by the FCA (Financial Conduct Authority) in UK. A lumpsum is paid out on redemption or maturity (in case of lock-in or fixed term) that is a function of debt fund performance. The returns can be positive as well as negative. Also, some funds carry counterparty default risk, despite trading in a highly regulated environment. People also opt for pooled investments in Exchange Traded Funds (ETF’s) that are less risky.
While making an investment decision, you must find the right balance between risks and returns. In the early days of your career, you must take risks by investing in stock markets. As you grow older, you should make a gradual shift from equity investments to debt investment, as per your risk appetite. It is important to note that you must make a buffer fund to meet your liquidity requirement so that you do not have to dig into your investments, especially which have a lock-in period, in case of any exigencies. Premature redemption could attract penalties. Protect your capital at all cost. In the last leg of your working life, you must stick to safer bets such as Gilt funds or bank deposits that offer low risk and guaranteed return on investment. Post retirement, the corpus could be invested in a regular income plan to create a recurring source of income. However, before investing, you must seek advice from your financial adviser.